Tips for surviving a recession

PREPARATION: Strategies for surviving a recession

Published 4:00 am, Thursday, January 24, 2008

Face it. The odds of a recession have grown. That's why the Fed slashed interest rates this week and why President Bush and Congress are eager to get checks into the hands of consumers.

What should you do to prepare for a recession?

"Two things you don't want to do is buy a second house and figure out how to sell the current one later or quit your job and figure out how to get another one later," says Jeff Lancaster, a principal with money management firm Bingham, Osborn & Scarborough.

Many experts say the housing and job markets are likely to get worse before they get better. That's because economic stimuli generally take six to 18 months to have an impact.

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Recessions aren't officially recognized until months or years after they happen, but some economists say one has begun. David Rosenberg of Merrill Lynch notes in a report that the four factors the National Bureau of Economic Research uses to gauge recessions - employment, real personal income, industrial production, and real manufacturing and retail sales - all peaked in November or December, suggesting we entered one in January.

Rosenberg expects home prices will decline 15 percent in 2008 and 10 percent more in 2009. He predicts that unemployment - which jumped to 5 percent in December from 4.7 percent in November - will hit 5.75 percent by year end and 6 percent by early 2009.

Rosenberg is more bearish than most. A Bloomberg survey of 35 economists published Jan. 9 put the odds of a recession at 40 percent. But if you would rather be safe than sorry, here are some ways to batten down the hatches:

-- Assess your job situation. In a recession, no one is immune from layoffs. Today, anyone in housing, real estate or finance is especially vulnerable.

If you're worried about your job, consider investigating or training for a new career.

-- Build an emergency fund. You should have at least three to six months' of living expenses in a safe place such as a money market fund or savings account. If you don't, here are some ways to build an emergency fund:

Pare spending on nonessentials such as cable TV, restaurants and entertainment.

Increase your income by working more hours or getting a second job.

Clean out your closets. "I have a friend who just lost her job. She is having a ball selling a whole bunch of stuff on eBay, everything from a gold Cartier watch to smaller things," says Kit Yarrow a marketing and psychology professor at Golden Gate University.

Continue contributing enough to your retirement plan to get the full employer match, but consider putting any extra savings in your emergency fund until it is sufficient.

Contribute any check you might get from Uncle Sam to your emergency fund.

-- Pay off credit cards. It's sad to say, but many people "use their credit cards as a rainy day fund," Yarrow says.

If you pay off your balance now, when you can, you will be able to borrow more if times get tough (assuming your credit score doesn't deteriorate). Paying down debt will help improve your credit score.

-- Consider a home equity line of credit. If you have enough equity in your home, think about opening a line of credit while you still have a job. As long as you don't borrow against it, you won't incur interest charges and there's usually no fee. If you do lose your job, you can use it for emergency funds. You generally can't open a line of credit when you don't have a job.

These lines can be dangerous, however. "The problem is, every six months my bank sends me checks and reminds me I can write a check up to X, Y or Z," Lancaster says. "You need to be very disciplined" and resist the temptation to use it for nonessentials.

-- Don't spend to relieve anxiety. "When people become anxious around job loss, ironically, they will spend more. Shopping is one of the most psychologically soothing activities we have," Yarrow says. Rather than calming yourself at the mall, "be proactive and positive. Being in control of your money is the most important thing."

-- If you are laid off, file immediately for unemployment benefits. In California, you must file by phone or online and you can't begin collecting benefits until one week after you apply. To be eligible, you must have lost your job through no fault of your own, be able to work and be looking for employment.

-- Investigate health care options. If you lose your job, you usually can remain in your former employer's group health care plan for 18 to 36 months, but you generally pay the full cost plus an administrative fee. There may be cheaper options, such as adding yourself to a spouse or domestic partner's plan.

-- If you must raid your retirement plan, know the rules.

You can withdraw money from an individual retirement account for any reason. If it's a traditional IRA, you will owe income tax on the withdrawal plus - if you are younger than 59 1/2 - a 10 percent penalty. (Different rules apply to Roth IRAs and nondeductible IRAs.)

Many 401(k) plans let you borrow part of your balance for any reason, while others allow withdrawals if you can prove a financial hardship, but you will still owe income tax on the withdrawal plus, if you are younger than 59 1/2, a 10 percent penalty.

One exception: If you leave your employer for any reason in a year when you will be 55 or older, you can withdraw money from your 401(k) plan without paying a penalty, though you will still owe tax, says IRA expert Ed Slott.

If you leave your job and roll your 401(k) plan in to an IRA, you will have to wait until you turn 59 1/2 to take a penalty-free withdrawal.

-- Housing problems. If you will have problems paying your mortgage, talk to a reputable credit counseling agency or - if your situation is serious - a bankruptcy attorney.

To find a counseling agency sponsored by the U.S. Department of Housing and Urban Development, call (800) 569-4287 or go to links.sfgate.com/ZCFW.

-- Monitor your investments. When the stock market is gyrating, it's tempting to sell stocks out of fear or buy them out of greed.

If you are long-term investor with a well-diversified portfolio and are comfortable with your allocation among stocks, bonds and short-term investments, there's no reason to be making any big changes.

If you are not comfortable, not diversified or need the money in the next year or two, take advantage of up days in the market to rebalance your portfolio.

Recessions and unemployment

-- Recessions: The last two recessions - from March to November 2001 and from July 1990 through March 1991 - were shorter than average, lasting eight months each.

Since 1945, the average recession lasted 10 months, but from 1919 to 1945, the average one dragged on for 18 months.

-- Unemployment: During the 2001 recession, the national unemployment rate rose from 4.3 to 5.5 percent. After the recession, it continued rising - hitting 6.3 percent in June 2003 - before falling again.

During the previous recession in 1990-91, unemployment went from 5.5 to 6.8 percent, but continued rising - hitting 7.8 percent in June 1992 - before falling again.

Sources: National Bureau of Economic Research, U.S. Bureau of Labor Statistics